Six chart patterns to recognize when trading momentum stocks with Edgewall
In the Past, finding stocks for momentum trading was difficult and time consuming. However, the process has been greatly simplified with a tool called Edgewall, an online platform that provides real-time stock alerts for low-float momentum stocks via a user-friendly dashboard. Edgewall scans markets for stocks with breakout potential and provides users with alerts and access to fundamental data and access to charts for each stock identified by advanced algorithms.
Along with researching fundamental indicators on the Edgewall platform, it is important to develop basic knowledge regarding technical analysis so that you can enter and exit trades in a way that will maximize your opportunity for profits.
In this article, we will look at six common continuation and reversal charts in order to help you analyze and set up your trades so that you can make informed, rapid decisions and succeed in the market. In order to help you recognize these patterns, I recommend using drawing tools on your charts in a similar fashion to the examples below.
Along with researching fundamental indicators on the Edgewall platform, it is important to develop basic knowledge regarding technical analysis so that you can enter and exit trades in a way that will maximize your opportunity for profits. In this article, we will look at six common continuation and reversal charts in order to help you analyze and set up your trades so that you can make informed, rapid decisions and succeed in the market. In order to help you recognize these patterns, I recommend using drawing tools on your charts in a similar fashion to the examples below.
In essence, the price of a stock can do three things; increase, decrease, or remain relatively unchanged. Although, a stock price does not only increase or decrease, we have identified what to look for in price charts that serve to indicate whether the stock will continue in the direction it is going, known as a Continuation Pattern, or a Reversal Pattern, which is a change in the direction the price is headed.
Continuation Patterns
Often when a stock is trending in a specific direction there may be short periods of time in which it may stop and fluctuate around a price point before continuing the trend it had been on. The patterns that we look for here are called “Continuation Patterns,” and help us make educated decisions about when to exit a trade.
1. Flags
This continuation pattern is called a flag, which occurs when the stock price fluctuates between two decreasing trend lines for a period of time before continuing in the direction that it had been on before. In the example below, we see that the stock continues to increase after the downwards fluctuation between the trendlines.
In order to maximize profit from this trade, we will enter the trade quickly when we see the stock price start to break through the top trendline, making sure not to wait too long and miss the uptrend. Once we have executed the trade, we must set a price target at which we will sell and take profit. We will also set a stop-loss order in order to protect our capital in the case that the stock price does not do what we expect; at Edgewall, we recommend limiting the downside to the 3% to 8% range. Tips for setting price targets and stop-losses can be found here.
An Example of a Flag Pattern
2. Ascending Triangle
The ascending triangle is a commonly used continuation pattern that occurs when two trend lines converge, characterized by the top line being flat while the bottom line rises to meet it. This type of triangle pattern often signifies that a positive surge in the stock price will occur. Thus, when we recognize this pattern, it may be a good time to take quick action to hold or increase your position in the stock.
In addition to the ascending triangle, there is a descending triangle as well, which occurs when the bottom trendline is flat and the top trendline slopes downward to form the triangle. This may signal the continuation of a downward trend in the price of the stock, in which it would be a good time to buy a position in the stock.
An Example of an Ascending Triangle Pattern
3. Wedges
A common type of continuation pattern is called a wedge. Similar to a flag pattern, a wedge is a small break from the overall trend of the stock. A wedge differs from a flag, however, in that the price will fluctuate between two converging price points that veer away from the overall price trend. This pattern is demonstrated in the example below as we see a “rising” wedge (see that the wedge is angled upwards). When we see a rising wedge, it is a good sign to exit a trade because the stock price will likely continue on the downward trend that it had been on before.
When trading a falling wedge, we will pick an entry point close to where our two trendlines come close to each other so that we can get the best price for our buy order. Similarly to trading other patterns, it is important to set price targets and stop-loss orders in order to maximize profits and minimize risk.
An Example of a Wedge Pattern
Reversal Patterns
When a stock does not continue on the trajectory that it had been on, we call it a reversal. There are several reversal patterns that we can recognize in order to jump on these reversing trends before other traders.
Recognizing reversal patterns is just as crucial to profitable trading as continuation patterns because it is important to recognize when to exit a trade. If we miss an exit, we risk losing all of the gains that we would have realized and may end up losing on the trade.
4. Head and Shoulders
One type of reversal pattern is called “head and shoulders,” based on the resemblance that this pattern has to the upper part of a human body. The pattern often signals the peak price for the day and is recognized by a false peak, followed by an even larger second peak, and finally a third peak that is about the same size as the first. We can see three reverse peaks in the example below of an “inverse head and shoulders,” which often signifies the lower end of a price swing.
When we see an inverse head and shoulders pattern, similar to the example below, it is a good time to consider entering a trade, as we can predict that the stock price will start an upward trend after a downward trend.
It is just as important that we try to recognize this pattern at the top end as well. A regular head and shoulders pattern will signify a good time to exit a trade, as we can predict that the stock price has lost its upward momentum and will begin to fall.
An Example of a Reverse Head and Shoulders Pattern
5. Double Top
The double top pattern is a second reversal pattern that signifies a reversal in the price trend. It can be recognized by looking like an “M” if it is reversing from bearish to bullish, or a “W” for the opposite. It is important to recognize the double top (bottom) so that you can buy or sell accordingly to maximize your gains on your trade after Edgewall has provided you with “long signal” and “momentum” alerts.
When you see a double top pattern, we generally exit a trade, as we expect the stock price to fall, thus we can collect the gains that we have made from this trade. It may also be a good idea to continue to watch the stock for a double bottom if the share price has fallen after exiting your trade; this may be a good time to take another position in the stock as the pattern suggests that it may rise again. Combining this knowledge of chart patterns with an Edgewall subscription provides you with great opportunities to make split second decisions that can help you succeed in the market.
An Example of a Double Top Pattern
6. Shooting Star Pattern
When you buy a stock after a “long signal” alert on Edgewall and are receiving “Momentum” alerts, it is important to look for signals in the charts for when to exit your position. One such signal is called a shooting star, which occurs after an upwards trend in the stock price. A shooting star is then formed when the stock price goes up during a period but then goes back down close to where it opened; it will look similar to the lone candlestick below. (We will explain more about how to read candlesticks in a coming article.)
Following the shooting star, we can be confident of a trend when we see the price start to drop. At this point, we should strongly consider exiting a position because we are predicting that the stock price will begin to fall and want to protect our gains.
An Example of a Shooting Star Candlestick
An Example of a Shooting Star Pattern
Key Takeaways:
- Patterns in stock prices can help us make predictions about which direction a stock will surge.
- In order to help identify patterns in stock prices, it is helpful to use drawing tools on charts.
- Using Edgewall along with a combination of technical and fundamental analysis will help you succeed as a trader.
Join Edgewall today!
Thanks for reading! Feel free to clap and share this article with your friends! We highly recommend you to join our discord server, premium group on telegram and twitter to engage with other traders, share tips and experiences, ask questions and let us know your feedback!
- Join Discord: https://discord.gg/PrY9hVuN9k
- Follow us on Twitter: https://twitter.com/Edgewall_
- Start your free trial! https://www.edgewall.io/register
